Built around the concept of owning multiple bank certificates of deposit that have different maturity dates, the Certificate Ladder Principle can offer a safe and effective way to help you earn more without requiring you to lock in all of your money for the long term.

There are pros and cons to Certificate Investing. Two potential disadvantages stand out:

Interest rate risk. Locking in an interest rate may give you the confidence and clarity of knowing exactly what you'll earn over the Certificate's term, but it also exposes you to the possibility of earning less than the market rate should rates rise after you've made the commitment.

Low liquidity. When you buy a Certificate, you're essentially agreeing not to touch your money until the end of its term — if an emergency forces you to cash out early, you'll lose some of the interest you've earned.

Fortunately, implementing a ladder strategy can help you offset both of these drawbacks.

To understand how it works, let's use Larry as an example. Larry has $5,000 he wants to put away in savings. He'd like more interest than a traditional savings account would earn, but he doesn't want to lock up all of his money for a long time period. At the moment, his bank's five-year Certificate offers the highest rate, but he's nervous that rates might rise after he commits himself.

The ladder strategy can directly address Larry's concerns. As shown in the chart, instead of putting all his money in one five-year Certificate, Larry decides to split it among five different Certificates, with maturity dates ranging between one and five years. By diversifying across five different Certificates, Larry avoids an all-or-nothing bet that the current five-year rate will be the best one available over that time period.

Money Invested

Certificate Term

Annual Percentage Yield

$1,000

5 year

1.66%

$1,000

4 year

1.50%

$1,000

3 year

1.31%

$1,000

2 year

1.10%

$1,000

1 year

0.86%

Examples given are hypothetical illustrations and not an indication of the benefits or features of any Christian Community Credit Union product. View our current rates.

As each CD matures, Larry can reinvest the money and any interest earned into a new five-year savings certificate. "Once it's fully built, a CD ladder works by giving you a pool of money that's earning longer-term rates, but that has short-term liquidity. In this scenario, Larry's average return is roughly equivalent to the current three-year interest rates, but he'll have a portion of his portfolio available after a year," says Scott Halliwell, a Certified Financial Planner.

Your Ladder, Your Choice

Like the idea, but still nervous about needing access to your cash?

Certificate ladders can be created with shorter maturity terms. If you're holding cash for emergency needs, for example, consider using a small portion of that savings to build a small ladder of three Certificates with maturity dates ranging from one to three months. As each Certificate matures, reinvest the proceeds into a new three-month Certificate. That way, you'll always be within a month of getting your hands on your money, and may still be able to earn a higher interest rate than in a traditional savings account.

"The trick to doing this effectively is to pick the right spacing of the rungs and the right overall length of the ladder for your particular situation, taking into account the interest rate environment at the time you're building the ladder," says Halliwell. "It's also important not to extend the ladder too far out so that you miss out too much if interest rates start to increase while the ladder's in place."